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COP AT A GLANCE

P/E ► -2.74   EV/EBITDA ► -8.27   ROA ► -16% VERY LOW ROE ► -36.4% VERY LOW Debt to Equity ► 1.48 AVG Current Ratio ► 0.903 AVG Interest Coverage Ratio ► -18.3 LOW

 

 

 

 

 

 

ConocoPhillips is the third largest of the oil majors in the world. It operates in all sectors of the oil and natural gas industry: exploration and production, midstream, refining and marketing, and petrochemicals, and supplements its own operations with a 20% share in Russian oil giant, Lukoil.^[1]

ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 30 countries.^[2]

Due to steep declines in oil prices at the end of 2008 and the beginning of 2009 COP net income dropped by up to 80% (in the first quarter of 2009), as compared to periods of one year earlier. With oil prices back on the decline, ConocoPhillips, like its major competitors Exxon Mobil, Chevron, Shell, BP, and Total, are facing increased pressure.

Business and Financials

In the third quarter of 2009 revenue was down 42% to $41.3 billion as compared to the same period last year. Net income was up from the previous quarter at $1.5 billion, but down 71% as compared to the third quarter of 2008. The decline was due primarily to lower oil and natural gas prices, as well as poor refining margins. ConocoPhillips stated that it will sell $10 billion in assets in the next two years and reduce 2010 capital expenditure by $1.5 billion to $10 billion.^[3]

Net income for the second quarter of 2009 was $1.3 billion, down 76% from the same period in 2008. This decrease was attributed to substantially lower prices for crude oil, natural gas and natural gas liquids, as well as lower refining margins.^[4]

In the first quarter of 2009 net income was $840 million, this was down 80% compared to the same time in 2008. This large decline was contributed primarily to dropping crude oil and natural gas prices.^[5]

ConocoPhillips had a loss of nearly $17 billion in 2008 because of the damage caused by falling oil and gas prices. The company wrote-down $25.4 billion of goodwill attributed to its E&P segment, and faced a $7.4 billion reduction in the carrying value of its LUKOIL investment.^[6] In addition, shrinking reserves forced the company to lower its production volume, all the while selling at a lower price.

Exploration and Production

The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids. ConocoPhillips' 2008 proved reserves contained 10 billion barrels of oil equivalents.^[23] It's oil production averaged 804 MBbl per day, its LNG production averaged 153 MBbl per day, and its natural gas production averaged 4.8 Bcf per day.^[24] In 2008 the E&P segment accounted for 67% of the company's total assets of $143 billion.^[25]

Lukoil Investments

ConocoPhillips owns a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.^[26] Lukoil has been hit hard been falling oil and natural gas prices. In its fourth quarter of 2008, net income fell $1.62 billion.^[27]

Midstream

COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand^[28].

Refining and Marketing

Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S and either owns or has an interest in six European refineries. At the end the second quarter of 2009 refinery production was 2,517 million barrels per day with a utilization of 88%. Utilization was driven by increased turnaround in Europe and reductions at its refinery in Wilhelmshaven, Germany.^[29]

The company has a distribution network of 10,500 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region.^[30]

Chemicals

COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.^[31]

Coal-Seam Methane Beds

In September 2008, COP entered a, $8 billion, 50/50 joint venture with Australian energy company Origin to develop coal-seam methane beds.^[32]

Trends and Forces

U.S. to Propose at the G-20 Summit to End Fossil Fuel Subsidies Within Five Years

At the end of September 2009 the G-20 summit will be held in Pittsburgh, Pennsylvania. It has been reported that the U.S. contingent will ask the G-20 to eliminate worldwide fossil fuel subsidies in five years. Currently G20 countries spend $335 billion every year for subsidies on oil, gas and coal.^[33] The U.S. will argue that the subsidies distort oil product markets and artificially raise fuel demand. It will also argue for more transparency of oil markets with more timely and accurate information about inventory levels and positions held in future markets.^[34] According to the White House's deputy national security adviser for international economic affairs, the elimination of subsidies will also improve energy security and fight climate change through conservation and the freeing up of additional funding for cleaner technologies.^[35]

Growing support against fossil fuels may have a negative impact on ConocoPhillips, especially if there is further support by the G-20. Ending of subsidies will affect all areas of its business, especially in rapidly expanding markets such as India and China, which have currently offset loses due to drops in demand elsewhere in the world.

Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips

Since the middle of 2008, oil prices have been trending downwards, to levels not seen since 2004. These falling oil prices have driven down COP's E&P margins. However, the company earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.^[36] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).^[37] Q3 earnings reflect a similar situation, during which crude oil prices for West Texas Intermediate averaged $117.83. Earnings estimates for the first quarter of 09 are a little less than 50% earnings for Q3 08, taking into consideration the new, low price of oil.^[38]

International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses

As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.

An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.^[39] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.^[40] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.

Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.^[41]

COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company^[42], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.^[43] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.^[44] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.

Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022^[45], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.

Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.^[46] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.^[47] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.

ConocoPhillips Often has to Pay Recompense for Environmental Damages

Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether^[48], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.

Competition

The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.

The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2008.

(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates

(1) Latest data is for 2007

The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.

References

1. ↑ COP 2007 10-K, Page 66
2. ↑ COP 2007 10-K
3. ↑ ^{3.0 3.1 3.2} Ordonez, Isabel, "UPDATE: ConocoPhillips 3Q Profit Falls 71%, Output Rises," October 28, 2009
4. ↑ COP 2Q 2009 Pg. 33
5. ↑ COP 1Q 2009 Pg. 29
6. ↑ COP 2008 10-K, Item 6, Page 34
7. ↑ COP 2008 10-K, Item 6, Page 32
8. ↑ ^{8.0 8.1} COP 10Q 1Q 2009, Page 1
9. ↑ ^{9.0 9.1} COP 10Q 2Q 2009, Page 1
10. ↑ COP 2008 10-K, Item 6, Page 38
11. ↑ COP 2008 10-K, Item 6, Page 52
12. ↑ COP 10Q 1Q 2009, Page 3
13. ↑ COP 10Q 2Q 2009, Page 3
14. ↑ ^{14.0 14.1 14.2 14.3 14.4 14.5} COP 10Q 3Q 2009
15. ↑ ^{15.0 15.1 15.2} COP 2008 10-K, Item 6, Page 42
16. ↑ ^{16.0 16.1 16.2 16.3} COP 10Q 1Q 2009, Page 31
17. ↑ ^{17.0 17.1 17.2} COP 10Q 2Q 2009, Page 35
18. ↑ COP 2008 10-K, Item 6, Page 47
19. ↑ COP 10Q 2Q 2009, Page 38
20. ↑ COP 10K 2008 Page 41
21. ↑ COP 10Q 1Q 2009 Page 30
22. ↑ COP 10Q 2Q 2009, Page 34
23. ↑ COP 8-K · For 2/19/08
24. ↑ COP 2007 10-K
25. ↑ COP 2008 10K Page 2
26. ↑ COP 2007 10-K, Page 66
27. ↑ Wall Street Journal - 3rd UPDATE: Lukoil Posts 4Q Loss; May Cut 2009 Capex Further
28. ↑ MarketWatch: "BP, Conoco team up on major Alaska gas pipeline"
29. ↑ ConocoPhillips 2Q 10Q 2009, Pg. 39
30. ↑ ConocoPhillips Company Website, accessed on September 16, 2009
31. ↑ COP 2007 10-K
32. ↑ MarketWatch: "ConocoPhillips bids $8B for Origin Energy assets"
33. ↑ Rickman, James, "The Economic Impact of the G20 Ending Oil Subsidies," SeekingAlpha.com, September 17, 2009
34. ↑ "US wants G20 to axe fuel subsidies, tighten rules-source," Reuters.com, September 4, 2009
35. ↑ Geman, Ben, "White House Wants Fuel Subsidy Cuts on G-20 Agenda," New York Times, September 16, 2009
36. ↑ COP 2007 10-K
37. ↑ Seeking Alpha: "ConocoPhillips Q1 2008 Earnings Call Transcript" Page 2
38. ↑ BusinessWeek - Investing:ConocoPhillips (COP:NYSE)
39. ↑ MarketWatch: "ConocoPhillips joins $10 billion Abu Dhabi project"
40. ↑ The National Terror Alert Response Center: "US Puts Citizens In UAE on Terrorism High Alert"
41. ↑ COP 2007 10-K, Page 11
42. ↑ http://www.lukoil.com/
43. ↑ BBC News: "Shell yields to Gazprom pressure"
44. ↑ Energy Business Review: " Gazprom confirms TNK-BP interest, more gas deals"
45. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
46. ↑ Washington Post: "A Green(er) Obama"
47. ↑ COP 1Q08 10-Q
48. ↑ The New York Times: " Oil Giants To Settle Water Suit "
49. ↑ COP 2008 10-K, Item 8,Page 149
50. ↑ COP 2008 10-K, Item 8,Page 152
51. ↑ ^{51.0 51.1} RDS’A 2008 20-F, Supplementary Information, Crude oil and natural gas liquids
52. ↑ ^{52.0 52.1} XOM 2008 10-K, Item 1, Page6
53. ↑ ^{53.0 53.1} CVX 10-K 2009, Item 1, Page 7
54. ↑ ^{54.0 54.1} BP 2008 20-F, Item 1, Page 16
55. ↑ Lukoil Investor Relations – Fact Book 2008, Page 11
56. ↑ ^{56.0 56.1 56.2 56.3} ENI S.p.A. – Fact Book 2007, Page 11
57. ↑ ^{57.0 57.1} TOT 2008 20-F, Item 4, Page 10
58. ↑ COP 2008 10-K, Item 8, Page 151
59. ↑ ^{59.0 59.1} RDS’A 2008 20-F, Supplementary Information, Natural gas
60. ↑ Lukoil Investor Relations – Fact Book 2008, Page 12
61. ↑ ^{61.0 61.1} COP 2008 10-K, Item 6, Page 42
62. ↑ ^{62.0 62.1} XOM, 2008 10-K, Item 6, Page 36
63. ↑ ^{63.0 63.1} CVX 2008 10-K, Item 1, Page 5
64. ↑ ^{64.0 64.1} BP 2008 20-F, Item 1, Page 14
65. ↑ Lukoil Investor Relations – Fact Book 2008, Page 13
66. ↑ ^{66.0 66.1} TOT 2008 20-F, Item 4, Page 12
67. ↑ Lukoil Investor Relations – Fact Book 2008, Page 14
68. ↑ E 2007 Annual Report
69. ↑ SUN 2008 10-K, Item 7, Page 35
70. ↑ ^{70.0 70.1} CVX 10-K 2009, Item 1, Page 24
71. ↑ VLO 2008 10-K, Item 1, Page 3
72. ↑ ^{72.0 72.1} XOM 2008 10-K, Item 6, Page 43
73. ↑ RDS’A 2008 20-F, Results, Refining Data
74. ↑ Sinopec Investor Relations, Operational Statistics for 2008
75. ↑ WNR 2008 10-K, Item 7, Page 34
76. ↑ ^{76.0 76.1} COP 2008 10-K, Item 1, Page 16
77. ↑ ^{77.0 77.1} BP 2008 20-F, Item 1, Page 29
78. ↑ Lukoil Investor Relations – Fact Book 2008, Page 15
79. ↑ Conversion factor is 1 BPD = 50 tonnes per year
80. ↑ ^{80.0 80.1 80.2} TOT 2008 20-F, Item 4, Page 36
81. ↑ SUN 2008 10-K, Item 1, Page 1
82. ↑ ^{82.0 82.1} VLO 10-K 2008, Item 1, Page 1
83. ↑ RDS’A 2008 20-F, Results, Manufacturing
84. ↑ Sinopec Refining Overview
85. ↑ WNR 2008 10-K, Item 1, Page 19
86. ↑ Lukoil Investor Relations – Fact Book 2008, Page 16
87. ↑ SUN 2008 10-K, Item 1, Page7
88. ↑ CVX 10-K 2008, Item 1, Page 25
89. ↑ CVX 10-K 2008, Item 1, Page 26
90. ↑ XOM 2008 10-K, Item 2, Page 25
91. ↑ RDS’A 2008 20-F, Results, Marketing
92. ↑ Sinopec 2008 Annual Report, Business Review and Prospects, Page 20
93. ↑ WNR 2008 10-K, Item 1, Page 3
94. ↑ COP 2008 10-K, Item 1, Page 18
95. ↑ BP 2008 20-F, Item 1, Page 30
96. ↑ Lukoil Investor Relations – Fact Book 2008, Page 60